A note on the dynamics of incentive contracts
AbstractLaffont and Tirole  show that when the uncertainty about the agent's ability is small, the equilibrium must involve a large amount of pooling, but it is not necessary to be a partition equilibrium. They construct a nonpartition continuation equilibrium for a given first-period menu of contracts and conjecture that this continuation equilibrium need not be suboptimal for the whole game under small uncertainty. We show that, irrespective of the amount of uncertainty, this nonpartition continuation equilibrium generates a smaller payoff for the principal than a different menu of contracts with a partition continuation equilibrium. In this sense, Laffont and Tirole's menu of contracts, giving rise to a nonpartition continuation equilibrium, is not optimal. An intuition behind this result is provided that may shed some light on the problem of dynamic contracting without commitment.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
Bibliographic InfoArticle provided by Springer in its journal International Journal of Game Theory.
Volume (Year): 40 (2011)
Issue (Month): 3 (August)
Contact details of provider:
Web page: http://link.springer.de/link/service/journals/00182/index.htm
Other versions of this item:
- Ching-jen Sun, 2008. "A Note on the Dynamics of Incentive Contracts," Economics Series 2008_23, Deakin University, Faculty of Business and Law, School of Accounting, Economics and Finance.
- Sun, Ching-jen, 2007. "A Note on the Dynamics of Incentive Contracts," MPRA Paper 9813, University Library of Munich, Germany, revised Feb 2008.
- D86 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Economics of Contract Law
- L51 - Industrial Organization - - Regulation and Industrial Policy - - - Economics of Regulation
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Bester, Helmut & Strausz, Roland, 2001. "Contracting with Imperfect Commitment and the Revelation Principle: The Single Agent Case," Econometrica, Econometric Society, vol. 69(4), pages 1077-98, July.
- Jean-Jacques Laffont & Jean Tirole, 1985.
"The Dynamics of Incentive Contracts,"
397, Massachusetts Institute of Technology (MIT), Department of Economics.
- Jean Tirole & Jean-Jaques Laffont, 1985.
"Using Cost Observation to Regulate Firms,"
368, Massachusetts Institute of Technology (MIT), Department of Economics.
- Caillaud, Bernard & Mezzetti, Claudio, 2004. "Equilibrium reserve prices in sequential ascending auctions," Journal of Economic Theory, Elsevier, vol. 117(1), pages 78-95, July.
- Schilizzi, Steven & Breustedt, Gunnar & Latacz-Lohmann, Uwe, 2010. "Should we combine incentive payments and tendering for efficiently purchasing conservation services from landholders?," 2010 Conference (54th), February 10-12, 2010, Adelaide, Australia 59159, Australian Agricultural and Resource Economics Society.
- Schilizzi, Steven & Breustedt, Gunnar & Latacz-Lohmann, Uwe, 2011. "Does tendering conservation contracts with performance payments generate additional benefits?," Working Papers 100883, University of Western Australia, School of Agricultural and Resource Economics.
- Latacz-Lohmann, Uwe & Schilizzi, Steven & Breustedt, Gunnar, 2011. "Auctioning Outcome-Based Conservation Contracts," 51st Annual Conference, Halle, Germany, September 28-30, 2011 114523, German Association of Agricultural Economists (GEWISOLA).
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Guenther Eichhorn) or (Christopher F Baum).
If references are entirely missing, you can add them using this form.